Country Road downgrades profit by 20% as discounting puts pressure on margins

Retail chain Country Road has disappointed the market with a full-year trading update, announcing comparable like-for-like sales to June 30 were only up by 1.5% and revealing ongoing discounting is squeezing margins.

The performance is especially disappointing given Country Road’s 2008-09 full year sales, which saw the company increase its profit before tax to $21.9 million from $14 million in 2008, with net profit at $15.65 million. At the time, the company was praised as a template for retail success in the downturn.

Total sales were up 8.5% to $372.1 million, while total retail sales were up 13.2% to $289.3 million. Chief executive John Cheston also said in a statement net profit after tax will be about 15-20% lower than last year’s figures.

Just after the 2009 results were announced last August, former chief executive Ian Moir told SmartCompany the company would try to avoid discounting.

“It’s not about discounting. There are so many retailers that are driving sales through discounting as it just doesn’t work long-term. The fashion has to be on the money, the quality has to be there and the price has to be right,” he said.

Now, Country Road says lower prices across the industry have been the company’s downfall; stating “highly competitive discount led market conditions” have impacted the company’s margins, along with a hit from costs incurred from starting up the Trenery brand.

“During the year, Australia passed the anniversary of the 2008-09 Government stimulus payments and faced six interest rate increases. This impacted consumer spending and created a highly competition retail market in the country,” he said.

The comments also come just after a CommSec barometer of consumer spending revealed yesterday the industry will continue to suffer this year as interest rates rise.

Moir also said Country Road’s success depended on utilising its customer database, repositioning the brand to a younger audience and a key focus on stock management due to the troubled retail environment.

Cheston took over Moir’s role late last month, and declined to comment on this morning’s trading update.

The company’s problems have been taken as an indicator of how the retail industry will perform during this earnings season, but Retail Doctor chief executive Brian Walker says the problem isn’t just discounting. Rather, all the methods Country Road uses need to be taken into account.

“This type of report is symptomatic of discounting, but I think if you look at the whole operation things come into account. The sales line is still there, they’ve improved on their design, but they just aren’t holding up their margins.”

“At the end of the day, there are other factors in play. The target of the core market, I think they may have targeted slightly lower than where they should and maybe that isn’t working for them anymore.”

Walker also suggests the outfitting of the stores, staff training and interaction with loyalty programs are all factors which may need attention.

“No one is immune from this, it isn’t just Country Road, but if you want to create a good experience you need to figure out all the factors. Now Country Road is good at this, but they just have to face forward with their product and manage their working capital very well.”